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The Economic Approach to
Environmental and Natural
Resources, 3e
By James R. Kahn
© 2005 South-Western, part of the Thomson Corporation
Part III
Renewable Resources and
the Environment
Chapter 14
Biodiversity and Habitat
Preservation
© 2004 Thomson Learning/South-Western
Introduction
 Extinction of both plant and animal species is
occurring at an unprecedented rate and the result is
a decline in the total variety of life on earth (a loss of
biodiversity).
 A species becomes extinct when the last individual
organisms of the species die.
 There are both natural and anthropogenic sources of
extinction.
 The anthropogenic sources are related to market
failure.
 The primary question in this chapter is how to
provide the optimal level of biodiversity for an entire
ecosystem.
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Natural Extinctions
 Natural extinctions occur when the environment
changes and existing species find themselves at a
competitive disadvantage and are replaced by
existing species that are better adapted to the new
conditions.
 Natural extinctions are always occurring, usually at a
slow pace.
 The disappearance of the dinosaurs is an example of
a massive and rapid extinction, but it actually took
place over a period of about 2 million years.
 Table 14.1 lists extinctions of mammals over recent
history and shows the extremely rapid rate of
extinction that has occurred in modern times.
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Anthropogenic Causes of Species
Extinction
 There are several important anthropogenic
causes of extinction.
 These include excessive harvesting of the
species, loss of habitat, and competition
from nonnative species.
 Table 14.2 lists observed declines in animal
species and their anthropogenic causes.
 Table 14.3 lists the number of species in the
United States that are declining to the point
of extinction being a possibility.
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Loss of Habitat
 Many species are found only in a limited range of habitat, and if
this habitat is destroyed by conversion into another land use,
or contaminated by pollution, the species will become extinct.
 Loss of habitat may be associated with either open-access or
private property resources.
 Coral reefs tend to be open-access and are destroyed both by
pollution that is carried from firms located on a river to the
coral lagoons and by fishing activities such as the damaged
caused when recreational boats drop anchor.
 The owner of a wetland area who is contemplating converting
the wetlands to condominiums makes the decision by
comparing the private net benefits of conversion with the
private net benefits of preservation.
 Social net benefits are generally excluded.
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Competition from Nonnative Species
 Competition from nonnative species can also be viewed as an
externalities problem.
 Introduction of an exotic species is often associated with a
large ecological and social cost that is not realized by the
person who introduced the species.
 Non-native species may arrive as hitch-hikers with the
importation of other species, importation of goods, and in the
luggage and on the person of international travelers.
 A good example of this is the zebra mussel that has been
introduced into the US Great Lakes in the ballast water of
tanker ships.
 Non-native species impact native species through direct
predation, competition of ecological resources, or destruction
of habitat.
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Open-access Harvesting
 Common property resources often have restrictions
on their use while open-access resources do not.
 Cultural traditions of the Native Americans dictated
the use of bison herds and prevented the destruction
of the species.
 By contrast, when the Native Americans lost control
of their hunting grounds to nonnative Americans, the
buffalo herds became open-access common
property, with no restrictions on their use.
 No individual hunter had incentive to preserve the
resource, a destructive race began, with each buffalo
hunter seeking to shoot as many buffalo as possible
before they were shot by competing hunters.
 Buffalo quickly disappeared.
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Open-access Harvesting
 Modern examples of this type of open-access
harvesting pressure include many of the
large mammals of Africa and Asia, such as
the elephant, rhinoceros, tiger, bear, and
leopard.
 Although hunting of these animals is usually
forbidden by law, it is extremely difficulty to
enforce these prohibitions.
 High profits associated with illegal trade of
animals makes enforcement extremely
difficult.
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Costs of Losses of Biodiversity
 Biodiversity promotes ecosystem stability and
health.
 The more diverse a system the greater its ability to
withstand shocks and stresses.
 In addition, people view a healthy and biodiverse
ecosystem as intrinsically more valuable than a
degraded or less diverse system.
 Plants and animal species have value because they
may be used to produce economic goods.
 Organisms’ genes may be a source of genetic
information that could be used in the development of
new varieties of plants.
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Costs of Losses of Habitat
 A habitat provides an environment in which plants and animals
can exist.
 As an example, wetlands (which include forest wetlands,
freshwater marshes, saltwater marshes, bogs, bayous, and
mangroves) play a unique ecological role as a transition zone
between aquatic ecosystems and terrestrial ecosystems.
 Wetlands serve as a vast store of nutrients from terrestrial
sources that are gradually released into aquatic systems.
 Most estuarine shellfish and finfish are critically dependent on
the productivity of the wetlands.
 One of the most important roles of wetlands is to serve as a
buffer against storms.
 Wetlands absorb storm water and lessen floods from high
levels of rain.
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Policies for Maintaining Biodiversity and
Protecting Habitat
 It is important to develop policies which recognize
not only the commercial importance of biodiversity
in areas of medicine and agriculture, but also the
non-commodity benefits associated with biodiversity
and ecosystem health.
 Since the future benefits of biodiversity are
unknown, this is an example of the type of
environmental problem in which the precautionary
principle should be applied.
 Under this principle, policy would be created that
protected biodiversity as if the benefits were very
large, even though we cannot prove that they would
be large.
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Policies for Maintaining Biodiversity and
Protecting Habitat
 Another reason to invoke the precautionary principle
in biodiversity has to do with the idea of a minimum
viable population of species.
 A population level lower than this minimum viable
level would move the species toward extinction.
 A prudent policy would set the level of population
well above the minimum viable level.
 In some cases, captive breeding programs have
been used to help in the recovery of species that
have fallen below the minimum viable level.
 In the US, examples of these programs include the
bald eagle and California condor.
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Policies to Reduce Loss of Habitat
 Loss of habitat is the inevitable result of economic
and population growth.
 Excessive loss of habitat occurs when people
confront choices about how to utilize habitat but do
not have an incentive to incorporate preservation
values into their decision making.
 Consequently, marginal private cost of converting
habitat is less than marginal social cost.
 Closing the disparity between private and social
costs or alternatively, the disparity between private
and social benefits of preservation is an extremely
difficult task.
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Policies to Reduce Loss of Habitat
 Any policy must recognize the public good characteristics of
habitat preservation (nonrivalry and nonexcludability).
 An approach suggested by Sedjo for addressing the disparity
between private and social benefits from preserving rain
forests would allow the country where the plant, from which the
new medicine is derived, grows to receive a royalty payment
from its use (which allows the to country share in the benefits
from preservation).
 The implementation of marketable carbon permits would allow
countries to receive positive benefits, in the form of payments
from wealthier countries, in exchange for preservation of
forests.
 This would also address the issue of preserving carbon
sequestration.
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Policies to Reduce Loss of Habitat
 Some issues can be addressed with command and control
regulations.
 For example prohibition of wetland destruction and creation of
national parks and wildlife sanctuaries to protect critical
habitat.
 The first question that must be answered in the development of
policies to protect habitat is how much should be protected
and at what level of protection.
 Criteria for developing a prioritization scheme should consider:

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uniqueness of habitat,
biodiversity contained in the habitat,
importance of habitat for the provision of ecological services,
existence values associated with the habitat and
the cost of protecting the habitat.
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Policies to Reduce Loss of Habitat
 The Endangered Species Act of 1973 is a particularly important
and controversial piece of legislation directed at the protection
of habitat of endangered species.
 Under this act, it is illegal to use any federal funds in a fashion
that might further threaten endangered species.
 Since federal funds are used in many infrastructure projects
(roads, sewers, etc.) this legislation applies to a surprisingly
large proportion of development projects.
 A major criticism of this act is that it is oriented toward species
in trouble but does nothing directly to protect other species
from becoming endangered or threatened.
 This act came up for reauthorization in 1993, but was not
changed.
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Policies to Reduce Loss of Habitat
 There are two basic types of policies that are available for
protecting and preserving habitat in general.
 One involves the creation of protected areas such as national
parks.
 The other involves the restriction of use of privately owned lands.
For example, there are federal and state laws that restrict the
destruction of wetlands.
 In 1991, a controversy developed over the Bush administration
proposal to change the definition of a wetland from a definition
based on soil type and vegetation to one based on inundation
by water for specified times during the growing season.
 The new definition was not enacted but did serve to point out
the importance of a clear, consistent definition and the
potential for dramatic changes in wetland area designations
should the definition change.
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Policies to Reduce Loss of Habitat
 The development of wildlife refuges and nature preserves is
normally thought of as a government activity but is becoming
increasingly private.
 Nongovernmental organizations (NGOs), such as the Nature
Conservancy, can act as agents for individuals.
 These NGOs collect money from individual citizens and then
use the funds to buy critical habitat from private landowners.
 The private provision of a public good can take place because
of the role of nongovernmental organizations.
 These groups serve to reduce free rider problems by providing
an organization through which individual citizens can commit
to protect habitat.
 These organizations also serve to reduce the transactions
costs to citizen action.
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Policies to Reduce Problems with
Nonnative Species
 Policies for prevention of introduction of non-native species
are difficult to develop.
 The US has a policy of prohibiting importation of plants and
animals believed to be a risk to native species (black-listing).
 An alternative policy would be to develop a “white list” where
people would have to prove that an imported species is safe
before it could be imported.
 Direct controls can be used to make it illegal to have
undeclared plants and animals in possession when crossing
borders.
 The most promising economic incentive for addressing nonnative species is a liability system which would make importers
liable for future damages associated with imported plants and
animals.
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Policies to Reduce Open-Access
Exploitation
 The logical solution to open-access exploitation would be to
better define property rights.
 However, assignment of private property rights to wild game
and fish would be politically unfeasible.
 It is possible to design policies which limit access such as
season limits, limits on the number harvested, and restrictions
on how and where animals may be harvested.
 However, certain endangered or threatened animals are not
allowed to be harvested at all.
 Both assignment of property rights and restriction of access
are ineffectual when profits from illegal harvesting are high
relative to opportunity wage of the hunter, where the
opportunity wage is the highest alternative wage for the hunter
in a different occupation.
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Policies to Reduce Open-Access
Exploitation
 Policies directed at both supply and demand
can address the open-access issue.
 A combination of prohibitions on all sales of
animal products and publicity campaigns
making it socially unacceptable to use
animal products can eliminate the
profitability of the illegal trade.
 This was the rationale behind the ban on
ivory by the Convention for International
Trade in Endangered Species (CITES).
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Summary
 Biodiversity, or the total variety of life on earth, is
important for ecosystem stability, direct and indirect
contributions to social welfare, and the preservation
of genetic information.
 There three primary anthropogenic sources of loss
of biodiversity: overharvesting, competition from
nonnative species, and loss of habitat.
 Both command and control and economic incentives
can be used to reduce the socially inefficient loss of
habitat.
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